Proassurance Corporation · NYSE:PRA
Proassurance — 2013 Securities Research Conference
68 slides from Proassurance's conference presentation, May 14, 2013
Slide 1: 2013 Securities Research Conference Investor Meetings
2013 Securities Research Conference Investor Meetings May 14, 2013 2013 Securities Research Conference Edward L. Rand, Jr. Chief Financial Officer Frank B. O’Neil Investor Relations Officer Investor Meetings
Slide 2: Forward Looking Statements and Non-GAAP Measures
This presentation contains Forward Looking Statements and other information designed to convey our projections and expectations regarding future results. There are a number of factors which could cause our actual results to vary materially from those projected in this presentation. The principal ris
Slide 3: Q1 2013 Highlights
Q1 2013 Highlights Increased Net and Operating Income Y- O -Y ROE of 13.4% Book Value per share now $38.19 4% increase since year-end 2012 Book Value per Share has grown each year since Shareholder’s Equity and Total Assets at record levels Recent transactions contributing to our results with integr
Slide 4: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty liability insurance writer Healthcare Professional Liability (HCPL) Only “pure play” public company writing predominately HCPL Life sciences and medical devices Attorney’s professional liability Market Cap: ~$3.0 billion Shareholders’ Equity: $2.4 billion Tot
Slide 5: ProAssurance Business Profile
Q1 2013 Policyholders: ~64,600 Q1 2013 Premium: $163.2 mln ProAssurance Business Profile HCPL Distribution is Independent Agent (64%) / Direct (36%) Direct in Alabama, Florida and in all states for Podiatric business Dual distribution in DC, Texas and parts of Missouri LPL and Life Sciences is 100%
Slide 6: ProAssurance Geographic Profile
ProAssurance Footprint / All Lines ProAssurance Geographic Profile Broad geographic diversification Locally-based decision-making differentiates ProAssurance by addressing each state’s unique medical/legal challenges (Birmingham) Corporate Headquarters Corporate Headquarters Claims Offices Claims Of
Slide 7: $4.3 Billion Portfolio: Seeking Increased Yield But Balancing Risk
$4.3 Billion Portfolio Fixed Income: 84% Short Term: 2% Equity and Equity Substitutes: 12% BOLI: 1% Seeking Increased Yield But Balancing Risk We continue to focus on maintaining a high quality, well diversified fixed income portfolio We are making incremental changes to obtain higher yields in blue
Slide 8: Management Team
W. Stancil Starnes, JD Chairman & Chief Executive Officer Company Tenure: 6 Years Prior MPL Experience: 29 Years Total Industry & Related Experience: 35 Years Formerly in the private practice of law in MPL defense and complex corporate litigation Victor T. Adamo, JD, CPCU Vice-Chairman Company Tenur
Slide 9: Our Commitment to Treated Fairly
Our Commitment to Treated Fairly Unwavering dedication to the defense of non-meritorious lawsuits Allows our insureds the right to an unfettered defense of their claims where permitted by law Steadfast dedication to in-depth underwriting and adequate pricing An unsurpassed level of customer service
Slide 10: Strategies for Future Success
Strategies for Future Success Our successful experience and deep expertise uniquely qualify ProAssurance to insure the widest range of healthcare risks
Slide 11: Building a Bridge to the Future
Building a Bridge to the Future Our core business is at a pivot point We are uniquely positioned to succeed by serving the emerging market and remaining legacy business Smaller competitors with less experience and capacity have decisions to make Legacy business is largely single-state, solo and smal
Slide 12: Building a Bridge to the Future
Building a Bridge to the Future Larger risks will demand sophisticated coverages that span the continuum of healthcare Broad healthcare liability experience is our foundation We added capacity & capability through M&A Example: Medmarc, PICA and Mid-Continent Home Healthcare Non-Traditional Delivery
Slide 13: M & A and the Insurance Cycle
M & A and the Insurance Cycle ProAssurance’s Successful M&A Strategy Consolidation will continue and will remain episodic Fewer significant targets Remaining companies of size are in important strategic areas We prefer “health care centric” but will consider closely related liability lines Legal/reg
Slide 14: ProAssurance's Successful M&A History
ProAssurance’s Successful M&A History Original Companies Purchased Company Demutualization OHIC HOSPITALS ONLY Renewal Rights Assumed Business † SERTA
Slide 15: ProAssurance Will Grow Prudently
ProAssurance Will Grow Prudently ProAssurance is a demonstrated leader in M&A We will broaden our lines of coverage as needed Healthcare-related Through prudent leverage of our expertise and the addition of specialized expertise The market will firm and we are prepared to grow organically Past histo
Slide 16: Strategy for an Evolving Market
Strategy for an Evolving Market Shaped by a healthcare landscape that will change—with or without federal healthcare reform Expanding our capabilities and commitment across the continuum of healthcare Building on two decades of hospital experience Recent expansion into products liability for life sc
Slide 17: Strategy for an Evolving Market: Ascension Health
Strategy for an Evolving Market Leverage our reach, expertise and financial strength with larger accounts Largest non-profit healthcare system in the US Now in Michigan, Florida, Illinois, Indiana and Texas Insuring Ascension-affiliated physicians through coordinated, jointly insured programs Financ
Slide 18: Strategy for an Evolving Market
Strategy for an Evolving Market Joint physician/hospital insurance products to address the unique risk tolerance and claims- handling expectation of each insured Partnerships with existing physician-focused companies to leverage hospital expertise Recently announced California venture with CAP-MPT:
Slide 19: Healthcare Reform
Healthcare Reform No meaningful change after the election Known: More customers for us May accelerate the growth of hospital-owned practices and consolidation into larger groups Provides an opportunity for us due to our geographic reach, long-term experience in hospitals and our financial strength W
Slide 20: Today's Healthcare Professional Liability Market
Today’s Healthcare Professional Liability Market ProAssurance delivers an unparalleled level of service and financial stability that truly differentiates our coverage and our Company in an evolving, competitive market
Slide 21: HCPL Stands Apart in Insurance
HCPL Stands Apart in Insurance HCPL claims may not be filed for years after an incident and may take years to resolve: Long-tail Personal lines are short tail Introduces long periods of uncertainty Loss trends may change expected severity from time of initial pricing Can be mitigated by the use of t
Slide 22: The HCPL Market Today
The HCPL Market Today Prolonged period of “benign profitability” Premiums levels remain well above levels of 2000 Significant policyholder retention by all companies despite fierce competition No large commercial carriers have entered the market in a meaningful manner Significant barriers to entry i
Slide 23: Market Factors and Cycle Impact
Factor Frequency Severity Investment Returns Capital Cash Flow Reserves Reinsurance Status Stabilized Some Upward Indications Moderate Low Excess Capacity Becoming Strained Modestly Redundant Sufficient Capacity Cycle Impact Neutral — Harden Neutral Harden Soften Neutral — Harden Soften Neutral
Slide 24: The HCPL Market Today
The HCPL Market Today Changes in healthcare delivery are changing the underlying dynamics Physicians are combining into larger groups Physician practices are being brought into hospitals through purchase or affiliation Hospitals are combining into large networks requiring greater insurance expertise
Slide 25: The HCPL Market Today
The HCPL Market Today Market remains fragmented even after two decades of consolidation More than 100 writers Largest market share is ~8% 87% of top 100 companies have <2% 76% of top 100 companies have <1%
Slide 26: ProAssurance's Standing in HCPL
ProAssurance’s Standing in HCPL ProAssurance is the largest independent publicly-traded writer of HCPL insurance Fourth largest overall writer DPW: SNL Data 2012
Slide 27: Sound Strategy = Consistent Profitability
Sound Strategy = Consistent Profitability
Slide 28: The Payoff: Consistent Book Value Growth
Captures our focus on long-term excellence Increased every year we have been public The Payoff: Consistent Book Value Growth Inception to 3/31/13 CAGR: 16% Cumulative: 2,179% 10 Year Summary (2003 -2012) CAGR: 16% Cumulative: 360% Historical Book Value Per Share Split Adjusted Dividends Shown in the
Slide 29: The Payoff: Steady Share Price Increase
Share price reflects investor confidence in our business decisions and long-term strategy The Payoff: Steady Share Price Increase Historical Share Price Reflects all stock splits 2012 excludes $2.50/share special dividend Inception to 3/31/13 CAGR: 15% Cumulative: 1,706% 10 Year Summary (2003-2012)
Slide 30: Historical Financial Performance
Net Income 1 Operating Income 2 Historical Financial Performance Our disciplined, long-term approach drives consistent profitability $ in millions 1 Includes a gain of $35.5 million in the first quarter of 2013 in connection with our acquisition of Medmarc as a result of the value of the net assets
Slide 31: Q1 2013 Income Statement Highlights
March 31, Y-OVER-Y Change 2013 2012 Gross Premiums Written $ 163 $ 170 -4% Net Investment Result 32 31 +2% Total Expenses (Includes Loss Costs) 95 105 -10% Net Income (Includes Realized Investment Gains & Losses and gain on acquisition) $ 113 $ 56 +103% Operating Income $ 60 $ 48 +24% Net Income per
Slide 32: 2012 Income Statement Highlights
December 31, Y-OVER-Y Change 2012 2011 Gross Premiums Written $ 536 $ 566 -5% Net Investment Result 129 132 -2% Total Expenses (Includes Loss Costs) 320 302 +6% Net Income (Includes Realized Investment Gains & Losses) $ 275 $ 287 -4% Operating Income $ 257 $ 279 -8% Net Income per Diluted Share $4.4
Slide 33: Consistent Approach to Reserves
Consistent Approach to Reserves Consistent reserving practices provide protection against a loss trend reversal and capital erosion $ in thousands
Slide 34: Five Year Premium History
Five Year Premium History Disciplined Underwriting Consistently writing profitable business to ensure long-term success Premium decline driven by competition, physician consolidation and rate actions driven by an unprecedented favorable loss environment Gross Premiums Written Net Premiums Earned
Slide 35: Q1 2013 Balance Sheet Highlights
Shareholders’ Equity Q1 2013 Balance Sheet Highlights Split adjusted, in billions, except Book Value per share Shareholders’ Equity $ 2.4 $ 2.3 +4% Total Investments 4.3 3.9 +10% Total Assets 5.2 4.9 +6% Policy Liabilities 2.5 2.3 +9% 3/31/13 12/31/12 CHANGE 66% increase since 2008 Book Value per Sh
Slide 36: Long-Term Financial Strength
Total Assets Long-Term Financial Strength Our balance sheet is our top financial priority Financial strength differentiates us in the market The claims defense philosophy that differentiates us in the market leverages our financial strength
Slide 37: Capital Management Priorities and Share Repurchase History
Share Repurchase History Capital Management Priorities Preferred use is to support growth through M&A or new business We balance future needs with current market reality Regular dividend is $1.00/share ~2% yield based on 5/8/13 closing price Prudent share repurchase program $321 million spent to rep
Slide 38: Calendar Year Combined Ratio: ProAssurance Outperforms in MPL
Calendar Year Combined Ratio: ProAssurance Consistently Outperforms in MPL ProAssurance Outperforms the Industry Five Years: ProAssurance Average: 58.7% / Industry Average: 84.4% Ten Years: ProAssurance Average: 77.8% / Industry Average: 94.7% All Years: ProAssurance Average: 89.8% / Industry Averag
Slide 39: ProAssurance Pricing History
MD/DO Rate Change History ProAssurance Pricing History Peak pricing was in 2006 Improved frequency trends are reflected in recent rate declines Improvement in frequency has outweighed the steady, manageable rise in severity Loss trends have improved in states with and without tort reforms Rate chang
Slide 40: ProAssurance Retention Remains High
ProAssurance Retention Remains High Continued underwriting vigilance is being used today to ensure future success Market share is important, but NOT as important as profitability Retention remains in line with recent quarters
Slide 41: ProAssurance Operational Review
ProAssurance Operational Review ProAssurance delivers an unparalleled level of service and financial stability that truly differentiates our coverage and our Company in an evolving, competitive market
Slide 42: Underwriting for Profitability Not Market Share
Underwriting for Profitability Not Market Share Underwriting process driven by individual risk selection and assessment of loss history, areas of practice, and location Rates contemplate specific ROE expectations Frequent rate/loss reviews ensure adequate prices Rate filings consider the results of
Slide 43: Key State Rate Comparison
Key State Rate Comparison Annual Premium for a $1M / $3M Policy Filed or Approved at 1/01/13
Slide 44: Understanding Recent Loss Trends
Understanding Recent Loss Trends Frequency stable after historic declines Lawyers are the gatekeepers Must weigh the cost of a trial vs. chances of success Likelihood of success is affected by many factors Societal perceptions of lawsuits against physicians Effects of the overall Tort Reform debate
Slide 45: Claims Trends Remain Favorable
New Claims Opened Each Year ProAssurance Claims Tried to a Verdict Claims Trends Remain Favorable Fewer cases to try following significant decline in frequency Severity trends steady and manageable No observed effect from the economic downturn Trends are much the same in states with or without Tort
Slide 46: Differentiate Through Claims Defense
ProAssurance: 78% No Paid Losses Industry: 72% No Paid Losses Differentiate Through Claims Defense We leverage our financial strength to give our insureds the opportunity for an uncompromising defense of each claim Differentiates our product Provides long-term financial and marketing advantages Reta
Slide 47: The Ohio Example: 2005-2011 Data
More Claims Closed With No Indemnity More Claims Defended in Court Lower Average Indemnity Payment per Closed Claim The Ohio Example: 2005 - 2011 Data Comprehensive, reliable data provided by the Ohio Department of Insurance Broad range of competitors and business approaches www.insurance.ohio.gov/L
Slide 48: The Bottom Line Benefits of Strong Defense
Loss Payments as a Percentage of Total Loss Ratio 19% 21% 32% 48% 42% 44% The Bottom Line Benefits of Strong Defense Our ability and willingness to defend claims allows us to achieve better results Source: Statutory Basis, A.M. Best Aggregates & Averages Some totals may not agree due to rounding Pro
Slide 49: ProAssurance: Treated Fairly
PROASSURANCE. “Treated Faily
Slide 50: Capital Growth: 2008-Q1 2013
Capital Growth: 2008-Q1 2013 in $000’s except total equity (000,000’s) * Includes economic cost of holding treasury shares
Slide 51: Inside ProAssurance's Balance Sheet
Inside ProAssurance’s Balance Sheet 3/31/13
Slide 52: Inside ProAssurance's Income Statement
Inside ProAssurance’s Income Statement 3/31/13 $35.5 Non-Taxable Gain on Acquisition
Slide 53: Recent Book Value per Share History
Recent Book Value per Share History
Slide 54: Steady Return in an Unfavorable Environment
Steady Return in an Unfavorable Environment Long-term ROE target: 12% -14%
Slide 55: Current Prices Continue to Offer a Buying Opportunity
Current Prices Continue to Offer a Compelling Buying Opportunity Current Price to Q1 2013 Book: 1.2x Average Since Inception: 1.4x Driven to Excel / Focused on Shareholder Value Maintaining profitability Continuing growth in book value per share Producing sustainable shareholder value Focusing on lo
Slide 56: ProAssurance Transaction Discussion
ProAssurance Transaction Discussion Medmarc is broadening our product offerings and capabilities in protecting the delivery of healthcare With the acquisition of Independent Nevada Doctors Insurance Exchange (IND), ProAssurance becomes the leading medical professional liability writer in Nevada
Slide 57: Medmarc Transaction Update
Medmarc Transaction Update A leading products liability writer in medical technology and life sciences Meaningful legal professional liability book Acquisition completed effective January 1, 2013 Functioning as an operationally independent subsidiary Broad acceptance in Medmarc’s target markets Coor
Slide 58: IND Transaction Update
IND Transaction Update Leading MPL writer in Nevada Acquisition completed in late November 2012 Integration well underway and proceeding smoothly New business opportunities evolving as agents understand the scope and capability of the combined organizations
Slide 59: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 60: ProAssurance Investment Profile
$4.3 Billion Overall Portfolio $3.6 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 3.9 years Average tax-equivalent income yield: Q1 13: 4.2% / Q1 12: 4.4% Investment grade: 93% Weighted average: A+ 03/31/13 Tax credit portfolio not reflected in investment income—p
Slide 61: Portfolio Detail: Asset Backed
Asset Backed: $490 Million ProAssurance Portfolio Detail: Asset Backed 03/31/13 Subject to Rounding Weighted Average Rating: “AA+”
Slide 62: Portfolio Detail: Corporates
Corporates: $1.6 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: A- 3/31/13
Slide 63: Portfolio Detail: Municipals
Municipals: $1.3 Billion / Average Rating is AA ProAssurance Portfolio Detail: Municipals Investment policy has always required investment grade rating prior to applying the effect of insurance Weighted Average Rating: AA 12/31/12
Slide 64: Portfolio Detail: Equities & Other
Equities & Other: $489 Million ProAssurance Portfolio Detail: Equities & Other 12/31/12 4.9% TE Book Yield 13% TE IRR
Slide 65: Portfolio Detail: Various
Treasury / GSE: $291 Million Short Term: $149 Million BOLI: $53 Million ProAssurance Portfolio Detail: Various Rated A1/P1 or better Money Markets: Moody’s: Aaa S&P: AAA Weighted average rating Moody’s: AA3 S&P: AA- A. M. Best: A+ 03/3/13
Slide 66: ProAssurance: Treated Fairly
PROASSURANCE. “Treated Faily
Slide 67: Debt to Equity: Strong Capital Position
Debt to Equity Strong Capital Position Prepared for an improving market Conservative Use of Debt / Low Leverage Credit facility accessed for $125 million in short-term borrowing (December 2012) No Debt Prior to 2001
Slide 68: Long-Term ROE Target is 12%-14%: The Yield Trap
Long-Term ROE Target is 12%-14% The Yield Trap The choice: chase yield or extend duration We are maintaining duration, looking for opportunities Pricing discipline becomes even more critical in a low interest rate environment Lack of investment yield may be a hard market catalyst Return on Equity an